Main menu

Fiscal policy update

The federal budget numbers improved again in November (on a rolling 12-month basis), mainly because spending in recent months was less than the extraordinary levels of spending in October and November of last year. Nevertheless, it remains the case that both spending and tax revenues are "off the charts" for the post-war period. You have to go back to the early 1940s to find spending running at a higher share of GDP than today, and tax revenues running at a lower share of GDP. That was the time (WW II) that our debt/GDP ratio reached its highest point ever: almost 120%, whereas today it is about 54%. So today's figures are not actually unprecedented, but they are close.

The last chart puts the current budget picture into vivid relief. Spending is out of control due to bailouts, stimulus spending, and a robust increase in ongoing government spending and involvement in the economy. Revenues are extraordinarily weak thanks to the sharp economic downturn and only a few months of modest recovery.

From a supply-side perspective, what I would like to see is a cancellation of the stimulus spending, since it has already proved itself ineffective, and the application of the recovered funds to increase the private sector's incentives to work and invest. At the very least we should have a lower corporate tax rate to allow our businesses to compete in the world, and we should not allow the Bush tax cuts to expire at the end of next year. I think these two simple steps—calling off the stimulus, freezing tax rates at current levels, and reducing the corporate tax rate—would be a tremendous boost to confidence and investment, and would thus give the economy the "kick-start" that everybody seems to want.

Filled Under:


Posting Komentar